I'm just scratching the surface in many ways but eager to learn and grow. 

In addition, mention that your buyer will have significant "skin in the game" as they say.These are a few of the highlights I go over in my conversations, but it is also up to you to deliver on your word as best you can to deliver a quality tenant buyer.

On a wooden subfloor, options are slightly more limited, but I prefer hard surfaces when possible, as well as things that are easy to service and change out.  

Most won't, as they want you to have some skin in the game.

There are two factors that influence rate that he might be describing: buying points (paying a fee up front to get a lower rate) or LTV (the more "skin in the game" you have, the lower the rate).

I find that with these options, appraisal risk is still really high b/c even though the bank doesn't mind you having no skin in the game, the local appraiser doesn't want to give the CA investor who bought the property for pennies on the dollar months before a high ARV.

Painted all surfaces, refinished hardwoods, put in new countertops, backsplash and bar top, rebuilt deck, new HVAC, added custom built-in desk and shelving.

He is offering seller finance which on the surface is he will charge me $X per month and Once renovations are complete I can collect rent from the 2 units above the seller. 

I am not an attorney and am not familiar with your state laws so rather than getting opinions here, I suggest you go right to the source and ask an attorney or licensed professional locally who would know the answer to this.It appears on the surface like you gave all the legal notice and had an agreement to extend the lease for one year, now it is the tenant who wants to change it.

I think most commercial lenders will want you to have skin in the game but it may be possible as there's so many different products.